Perpetual Digression

12/07/2012

The Bureau of Labor Statistics released its "Employment Situation Summary" for the month of November. The unemployment rate declined to 7.7 percent, while nonfarm payroll employment increased by 146,000.

Total nonfarm payroll employment rose by 146,000 in November, and the unemployment rate edged
down to 7.7 percent, the U.S. Bureau of Labor Statistics reported today. Employment increased in retail
trade, professional and business services, and health care.

11/02/2012

The Bureau of Labor Statistics released its "Employment Situation Summary" for the month of October. The unemployment rate ticked up to 7.9 percent, while nonfarm payroll employment increased by 171,000.

Total nonfarm payroll employment increased by 171,000 in October, and the unemployment rate
was essentially unchanged at 7.9 percent, the U.S. Bureau of Labor Statistics reported today.
Employment rose in professional and business services, health care, and retail trade.

10/11/2012

The CBPP has updated its chart (full report) showing the source of the budget deficit, "and they continue to find that these deficits stem overwhelmingly from the economic downturn, the tax cuts first enacted under President Bush, and the wars in Iraq and Afghanistan." But going forward, it's the Bush-era tax cuts that make the largest contribution:

10/05/2012

The Bureau of Labor Statistics released its "Employment Situation Summary" for the month of September. The unemployment rate declined to 7.8 percent, while nonfarm payroll employment increased by 114,000.

The unemployment rate decreased to 7.8 percent in September, and total nonfarm payroll employment rose by 114,000, the U.S. Bureau of Labor Statistics reported today. Employment increased in health care and in transportation and warehousing but changed little in most other major industries.

"The Outlook for Economic Activity" from the September 12-13, 2012 FOMC Minutes:

FOMC Minutes September 12-13, 2012...Conditional on their individual assumptions about appropriate monetary policy, participants judged that the
economy would grow at a moderate pace over coming
quarters and then pick up somewhat in 2013 before
expanding in 2014 and 2015 at a rate modestly above
what participants saw as the longer-run rate of output
growth. The central tendency of their projections for
the change in real GDP in 2012 was 1.7 to 2.0 percent,
somewhat lower than in June. Many participants cha-
racterized the incoming data as having been to the
weak side of their expectations at the time of the June
meeting; several participants also cited the severe
drought as a factor causing them to mark down their
projections for economic growth in 2012. However,
participants’ projections for 2013 and 2014 were gener-
ally slightly higher than in June; this reflected, in part, a
greater assumed amount of monetary policy accommo-
dation than in their June submissions as well as some
improvement since then in the outlook for economic
activity in Europe. The central tendency of partici-
pants’ projections for real GDP growth in 2013 was 2.5
to 3.0 percent, followed by central tendencies for both
2014 and 2015 of 3.0 to 3.8 percent. The central ten-
dency for the longer-run rate of increase of real GDP
remained at 2.3 to 2.5 percent, unchanged from June.
While most participants noted that the increased degree
of monetary policy accommodation assumed in their
projections would help promote a faster recovery, par-
ticipants cited several headwinds that would be likely to
hold back the pace of economic expansion over the
forecast period, including slower growth abroad, a still-
weak housing market, the difficult fiscal and financial
situation in Europe, and fiscal restraint in the United
States.

Participants projected the unemployment rate at the
end of 2012 to remain close to recent levels, with a cen-
tral tendency of 8.0 to 8.2 percent, the same as in their
June submissions. Participants anticipated gradual im-
provement from 2013 through 2015; even so, they gen-
erally thought that the unemployment rate at the end of
2015 would still lie well above their individual estimates
of its longer-run normal level. The central tendencies
of participants’ forecasts for the unemployment rate
were 7.6 to 7.9 percent at the end of 2013, 6.7 to
7.3 percent at the end of 2014, and 6.0 to 6.8 percent at
the end of 2015. The central tendency of participants’
estimates of the longer-run normal rate of unemploy-

ment that would prevail under the assumption of ap-
propriate monetary policy and in the absence of further
shocks to the economy was 5.2 to 6.0 percent, un-
changed from June. Most participants projected that
the gap between the current unemployment rate and
their estimates of its longer-run normal rate would be
closed in five or six years, while a few judged that less
time would be needed.

Figures 3.A and 3.B provide details on the diversity of
participants’ views regarding the likely outcomes for
real GDP growth and the unemployment rate over the
next three years and over the longer run. The disper-
sion in these projections reflects differences in partici-
pants’ assessments of many factors, including appropri-
ate monetary policy and its effects on the economy, the
rate of improvement in the housing sector, the spillover
effects of the fiscal and financial situation in Europe,
the prospective path for U.S. fiscal policy, the extent of
structural dislocations in the labor market, the likely
evolution of credit and financial market conditions, and
longer-term trends in productivity and the labor force.
With much of the data for the first eight months of
2012 now in hand, the dispersion of participants’ pro-
jections of real GDP growth and the unemployment
rate this year narrowed in September compared with
June. The range of participants’ forecasts for the
change in real GDP in 2013 and 2014, however, was
little changed from June, on balance. The distribution
of projections for the unemployment rate was not
much altered for 2013, while for 2014 it narrowed a bit
and shifted down slightly. The range for the unem-
ployment rate for 2015 was 5.7 to 6.9 percent. As in
June, the dispersion of estimates for the longer-run rate
of output growth was fairly narrow, with the values
being mostly from 2.2 to 2.7 percent. The range of
participants’ estimates of the longer-run rate of unem-
ployment was 5.0 to 6.3 percent, a similar range to that
in June; this range reflected different judgments among
participants about several factors, including the outlook
for labor force participation and the structure of the
labor market...

09/13/2012

The third round of quantitative easing (QE3) was revealed by the FOMC in this statement. QE3 will consist of purchasing additional agency mortgage-backed securities at a pace of $40 billion per month. The FOMC reaffirmed their decision to keep the target range for the federal funds rate at 0 - 1/4 percent and exceptionally low through mid-2015 (previously late-2014). The FOMC will continue through the end of the year its program to extend the average maturity of its holdings of securities. In combination with previously announced actions by the FOMC, their holdings of longer-term securities will increase by about $85 billion each month through the end of the year.

(Emphasis is my own)

FOMC Statement: Information received since the Federal Open Market Committee met in August suggests that economic activity has continued to expand at a moderate pace in recent months. Growth in employment has been slow, and the unemployment rate remains elevated. Household spending has continued to advance, but growth in business fixed investment appears to have slowed. The housing sector has shown some further signs of improvement, albeit from a depressed level. Inflation has been subdued, although the prices of some key commodities have increased recently. Longer-term inflation expectations have remained stable.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee is concerned that, without further policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor market conditions. Furthermore, strains in global financial markets continue to pose significant downside risks to the economic outlook. The Committee also anticipates that inflation over the medium term likely would run at or below its 2 percent objective.

To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee agreed today to increase policy accommodation by purchasing additional agency mortgage-backed securities at a pace of $40 billion per month. The Committee also will continue through the end of the year its program to extend the average maturity of its holdings of securities as announced in June, and it is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities. These actions, which together will increase the Committee’s holdings of longer-term securities by about $85 billion each month through the end of the year, should put downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.

The Committee will closely monitor incoming information on economic and financial developments in coming months. If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases, and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability. In determining the size, pace, and composition of its asset purchases, the Committee will, as always, take appropriate account of the likely efficacy and costs of such purchases.

To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens. In particular, the Committee also decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that exceptionally low levels for the federal funds rate are likely to be warranted at least through mid-2015.

09/07/2012

The Bureau of Labor Statistics released its "Employment Situation Summary" for the month of August. The unemployment rate declined to 8.1 percent, while nonfarm payroll employment increased by 96,000. Mark Thoma provides a good interpretation of today's news: "Will August job report propel the Fed into action?"

Total nonfarm payroll employment rose by 96,000 in August, and the unemployment rate edged down to 8.1 percent, the U.S. Bureau of Labor Statistics reported today. Employment increased in food services and drinking places, in professional and techincal services, and in health care.

Total nonfarm payroll employment roes by 163,000 in July, and the unemployment rate was essentially unchanged at 8.3 percent, the U.S. Bureau of Labor Statistics reported today. Employment rose in professional and business services, food services and drinking places, and manufacturing.

08/01/2012

The FOMC announced their decision to keep the target range for the federal funds rate at 0 - 1/4 percent. The statement confirmed the FOMC intends to keep the federal funds rate low through late 2014 and decided to continue to extend the average maturity of its holdings of securities through end of the year. In addition "The Committee will closely monitor incoming information on economic and financial developments and will provide additional accommodation as needed...":

FOMC Statement: Information received since the Federal Open Market Committee met in June suggests that economic activity decelerated somewhat over the first half of this year. Growth in employment has been slow in recent months, and the unemployment rate remains elevated. Business fixed investment has continued to advance. Household spending has been rising at a somewhat slower pace than earlier in the year. Despite some further signs of improvement, the housing sector remains depressed. Inflation has declined since earlier this year, mainly reflecting lower prices of crude oil and gasoline, and longer-term inflation expectations have remained stable.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects economic growth to remain moderate over coming quarters and then to pick up very gradually. Consequently, the Committee anticipates that the unemployment rate will decline only slowly toward levels that it judges to be consistent with its dual mandate. Furthermore, strains in global financial markets continue to pose significant downside risks to the economic outlook. The Committee anticipates that inflation over the medium term will run at or below the rate that it judges most consistent with its dual mandate.

To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee expects to maintain a highly accommodative stance for monetary policy. In particular, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014.

The Committee also decided to continue through the end of the year its program to extend the average maturity of its holdings of securities as announced in June, and it is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities. The Committee will closely monitor incoming information on economic and financial developments and will provide additional accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability.

07/17/2012

The Chairman of the Federal Reserve, Ben Bernanke, presented the Semiannual Policy Report before the U.S. Senate committee on banking, housing and urban affairs. The following is the text of Chairman Bernanke's opening statement.

The Economic OutlookThe U.S. economy has continued to recover, but economic activity appears to have decelerated somewhat during the first half of this year. After rising at an annual rate of 2-1/2 percent in the second half of 2011, real gross domestic product (GDP) increased at a 2 percent pace in the first quarter of 2012, and available indicators point to a still-smaller gain in the second quarter.

Conditions in the labor market improved during the latter part of 2011 and early this year, with the unemployment rate falling about a percentage point over that period. However, after running at nearly 200,000 per month during the fourth and first quarters, the average increase in payroll employment shrank to 75,000 per month during the second quarter. Issues related to seasonal adjustment and the unusually warm weather this past winter can account for a part, but only a part, of this loss of momentum in job creation. At the same time, the jobless rate has recently leveled out at just over 8 percent.

Household spending has continued to advance, but recent data indicate a somewhat slower rate of growth in the second quarter. Although declines in energy prices are now providing some support to consumers' purchasing power, households remain concerned about their employment and income prospects and their overall level of confidence remains relatively low.

We have seen modest signs of improvement in housing. In part because of historically low mortgage rates, both new and existing home sales have been gradually trending upward since last summer, and some measures of house prices have turned up in recent months. Construction has increased, especially in the multifamily sector. Still, a number of factors continue to impede progress in the housing market. On the demand side, many would-be buyers are deterred by worries about their own finances or about the economy more generally. Other prospective homebuyers cannot obtain mortgages due to tight lending standards, impaired creditworthiness, or because their current mortgages are underwater--that is, they owe more than their homes are worth. On the supply side, the large number of vacant homes, boosted by the ongoing inflow of foreclosed properties, continues to divert demand from new construction.

After posting strong gains over the second half of 2011 and into the first quarter of 2012, manufacturing production has slowed in recent months. Similarly, the rise in real business spending on equipment and software appears to have decelerated from the double-digit pace seen over the second half of 2011 to a more moderate rate of growth over the first part of this year. Forward-looking indicators of investment demand--such as surveys of business conditions and capital spending plans--suggest further weakness ahead. In part, slowing growth in production and capital investment appears to reflect economic stresses in Europe, which, together with some cooling in the economies of other trading partners, is restraining the demand for U.S. exports.

At the time of the June meeting of the Federal Open Market Committee (FOMC), my colleagues and I projected that, under the assumption of appropriate monetary policy, economic growth will likely continue at a moderate pace over coming quarters and then pick up very gradually. Specifically, our projections for growth in real GDP prepared for the meeting had a central tendency of 1.9 to 2.4 percent for this year and 2.2 to 2.8 percent for 2013.These forecasts are lower than those we made in January, reflecting the generally disappointing tone of the recent incoming data.In addition, financial strains associated with the crisis in Europe have increased since earlier in the year, which--as I already noted--are weighing on both global and domestic economic activity. The recovery in the United States continues to be held back by a number of other headwinds, including still-tight borrowing conditions for some businesses and households, and--as I will discuss in more detail shortly--the restraining effects of fiscal policy and fiscal uncertainty. Moreover, although the housing market has shown improvement, the contribution of this sector to the recovery is less than has been typical of previous recoveries. These headwinds should fade over time, allowing the economy to grow somewhat more rapidly and the unemployment rate to decline toward a more normal level. However, given that growth is projected to be not much above the rate needed to absorb new entrants to the labor force, the reduction in the unemployment rate seems likely to be frustratingly slow. Indeed, the central tendency of participants' forecasts now has the unemployment rate at 7 percent or higher at the end of 2014.

The Committee made comparatively small changes in June to its projections for inflation. Over the first three months of 2012, the price index for personal consumption expenditures (PCE) rose about 3-1/2 percent at an annual rate, boosted by a large increase in retail energy prices that in turn reflected the higher cost of crude oil. However, the sharp drop in crude oil prices in the past few months has brought inflation down. In all, the PCE price index rose at an annual rate of 1-1/2 percent over the first five months of this year, compared with a 2-1/2 percent rise over 2011 as a whole. The central tendency of the Committee's projections is that inflation will be 1.2 to 1.7 percent this year, and at or below the 2 percent level that the Committee judges to be consistent with its statutory mandate in 2013 and 2014.

Risks to the OutlookParticipants at the June FOMC meeting indicated that they see a higher degree of uncertainty about their forecasts than normal and that the risks to economic growth have increased. I would like to highlight two main sources of risk: The first is the euro-area fiscal and banking crisis; the second is the U.S. fiscal situation.

Earlier this year, financial strains in the euro area moderated in response to a number of constructive steps by the European authorities, including the provision of three-year bank financing by the European Central Bank. However, tensions in euro-area financial markets intensified again more recently, reflecting political uncertainties in Greece and news of losses at Spanish banks, which in turn raised questions about Spain's fiscal position and the resilience of the euro-area banking system more broadly. Euro-area authorities have responded by announcing a number of measures, including funding for the recapitalization of Spain's troubled banks, greater flexibility in the use of the European financial backstops (including, potentially, the flexibility to recapitalize banks directly rather than through loans to sovereigns), and movement toward unified supervision of euro-area banks. Even with these announcements, however, Europe's financial markets and economy remain under significant stress, with spillover effects on financial and economic conditions in the rest of the world, including the United States. Moreover, the possibility that the situation in Europe will worsen further remains a significant risk to the outlook.

The Federal Reserve remains in close communication with our European counterparts. Although the politics are complex, we believe that the European authorities have both strong incentives and sufficient resources to resolve the crisis. At the same time, we have been focusing on improving the resilience of our financial system to severe shocks, including those that might emanate from Europe. The capital and liquidity positions of U.S. banking institutions have improved substantially in recent years, and we have been working with U.S. financial firms to ensure they are taking steps to manage the risks associated with their exposures to Europe. That said, European developments that resulted in a significant disruption in global financial markets would inevitably pose significant challenges for our financial system and our economy.

The second important risk to our recovery, as I mentioned, is the domestic fiscal situation. As is well known, U.S. fiscal policies are on an unsustainable path, and the development of a credible medium-term plan for controlling deficits should be a high priority. At the same time, fiscal decisions should take into account the fragility of the recovery. That recovery could be endangered by the confluence of tax increases and spending reductions that will take effect early next year if no legislative action is taken. The Congressional Budget Office has estimated that, if the full range of tax increases and spending cuts were allowed to take effect--a scenario widely referred to as the fiscal cliff--a shallow recession would occur early next year and about 1-1/4 million fewer jobs would be created in 2013.These estimates do not incorporate the additional negative effects likely to result from public uncertainty about how these matters will be resolved. As you recall, market volatility spiked and confidence fell last summer, in part as a result of the protracted debate about the necessary increase in the debt ceiling. Similar effects could ensue as the debt ceiling and other difficult fiscal issues come into clearer view toward the end of this year.

The most effective way that the Congress could help to support the economy right now would be to work to address the nation's fiscal challenges in a way that takes into account both the need for long-run sustainability and the fragility of the recovery. Doing so earlier rather than later would help reduce uncertainty and boost household and business confidence.

Monetary PolicyIn view of the weaker economic outlook, subdued projected path for inflation, and significant downside risks to economic growth, the FOMC decided to ease monetary policy at its June meeting by continuing its maturity extension program (or MEP) through the end of this year. The MEP combines sales of short-term Treasury securities with an equivalent amount of purchases of longer-term Treasury securities. As a result, it decreases the supply of longer-term Treasury securities available to the public, putting upward pressure on the prices of those securities and downward pressure on their yields, without affecting the overall size of the Federal Reserve's balance sheet. By removing additional longer-term Treasury securities from the market, the Fed's asset purchases also induce private investors to acquire other longer-term assets, such as corporate bonds and mortgage backed-securities, helping to raise their prices and lower their yields and thereby making broader financial conditions more accommodative.

Economic growth is also being supported by the exceptionally low level of the target range for the federal funds rate of 0 to 1/4 percent and the Committee's forward guidance regarding the anticipated path of the funds rate. As I reported in my February testimony, the FOMC extended its forward guidance at its January meeting, noting that it expects that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014. The Committee has maintained this conditional forward guidance at its subsequent meetings. Reflecting its concerns about the slow pace of progress in reducing unemployment and the downside risks to the economic outlook, the Committee made clear at its June meeting that it is prepared to take further action as appropriate to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability.